Going public takes LOTS of equity

When we talk to entrepreneurs about exit strategy, inevitably many of them say “we’re going public.”  The ambition is fantastic to see, but it’s important to stay grounded and understand what’s required:  Aside from tens of millions in revenue if not $100mm+ in annual revenue, public SaaS companies have historically shown that they burn through a lot of investor capital to get there.    

 

To figure out how much equity it takes the typical SaaS business, we did some very rough back of the envelope work on the 40 SaaS businesses we monitor.  We looked at each company’s “Capital Surplus” defined as the amount which a firm raises in excess of the par value of the shares.  It basically tells you how much cash equity has gone into the business.  Note however, the analysis is to be taken with a grain of salt because among other things: i) it includes proceeds from every round including the IPO and post IPO rounds; ii) it does not include re-invested proceeds used to build the business; and iii) it does not include debt capital used to build the business.  Regardless, this figure is as close as we can get to the amount of equity used to take a SaaS company public, without actually knowing the details of each equity round. 

 

The analysis shows that on average and median, the 40 public SaaS companies have raised $706mm and $379mm in equity which are staggering sums of cash.  Note the average is being lifted by LinkedIn and Salesforce and without those two the average falls to $480mm.  The range of equity needed is $167mm at the low end (Wix) to $5.4bln at the high end (Salesforce).  Although this analysis is highly imperfect, it should give you the sense that SaaS businesses use a lot of cash to go public. 

 

On a side note, these businesses have a median and average enterprise value of $4.2bln and $2.9bln meaning they’re trading at 4.2x book equity and 2.9x book equity.  These multiples are something to be cognizant of as we see many deals getting done at a multiple of capital higher than 3x to 4x.  Although multiple of capital is an unusual way to look at a business, we like looking at this metric as it does give us a sense of a company’s cash efficiency and punishes cash inefficiency.    

 

In summary, going public is a great goal, but unless you’re the rare SaaS business that can do it without raising a lot of cash, recognize that it will take a lot money and well healed investors to get there. 

 

A link to the data is as follows:

https://www.dropbox.com/s/uzqatwygmtw3yx3/SaaS%20Comps%20-%20%20DAN%20Fund%20v7.xlsx?dl=0

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